Scoring McCain’s Tax Proposals

By :: April 17th, 2008

By Len Burman and Greg Leiserson

Senator McCain wants to make government much, much smaller.  His specifics on how are sketchy—eliminate earmarks, programs that don’t work, waste… But his tax day speech gives us an idea of how much he wants to shrink the government. A lot. And even more than when we last blogged on the subject back in February.

He proposes to make President Bush’s tax cuts permanent, repeal the AMT, double the dependent exemption, raise the estate tax exemption and lower its rate, make permanent the research credit, and suspend federal gas taxes this summer. He’d also cut the top corporate tax rate from 35 to 25 percent and allow companies to deduct machinery and equipment immediately, rather than amortizing them. He also plans to close corporate tax loopholes worth $30 billion per year.

Even with the loophole closers, these proposals would reduce federal revenues by about $5.7 trillion over ten years if they could be enacted immediately.  Under a more realistic assumption that they don’t take effect until October 2009, the cost would be about $5.4 trillion. (Details of our calculations are in TPC table T08-0071.)

Cuts this size would pare government back to levels not seen since the Eisenhower administration. In FY 2012, tax revenues would be reduced by about $550 billion compared with current law (with the tax cuts expired). That is roughly equal to CBO’s baseline projection for all nondefense discretionary spending.

McCain’s proposal is $300 billion bigger than all of President Bush’s FY2012 tax cut proposals. Tax revenues would be about 16.8 percent of GDP. By comparison, spending this year is about 20 percent of GDP.

We haven’t mentioned the optional simple alternative tax because not enough details have been made public to estimate its effect. We do know that it would have two rates and a high standard deduction.  Taxpayers could elect to pay it or their liability under the old income tax.  While vague, it sounds like a proposal made by Senator Thompson, which would have reduced federal tax revenues by even more than the basic McCain proposal—about $6.6 trillion over 10 years ($6.3 trillion starting in FY2010). Adding the cost of the corporate tax cuts, the total comes to $8 trillion over 10 years ($7.6 trillion starting in FY10). That scenario would reduce federal tax revenues by $780 billion in FY2012—$140 billion more than the entire defense budget in that year. Our analysis of the Thompson tax plan is available here

These estimates make one thing clear. Senator McCain plans a radical downsizing of government. Slashing pork, earmarks, and underperforming programs would offset only a fraction of the revenues. Cuts the size of those he proposes will require slashing discretionary spending and entitlements, and probably even reining in defense spending. Small wonder he has backed away from his earlier pledge to balance the budget—meaning that these tax cuts, like the ones signed by President Bush, will be paid for by our children.

15Comments

  1. Anonymous  ::  6:55 pm on April 17th, 2008:

    Some people may not be troubled by sticking their kids with the debt, but don't realize that they'll still have to pay the interest. Interest on the debt already represents 9% of all federal spending, including defense, Medicare, and Social Security. Do you have estimates of the added interest costs if these proposals were enacted without being paid for?

  2. Anonymous  ::  10:11 pm on April 18th, 2008:

    You're right. Using CBO's interest rate assumptions, there would be $1,254 billion in additional interest expense. It actually might be worse than this because we spread out the cost of expensing, but it's likely to be heavily front-loaded. On the other hand, expensing could cost less over the long-term than implied by the simple estimates.

  3. Anonymous  ::  7:13 pm on April 26th, 2008:

    Len:
    Minor point: Machinery and equipment are depreciated not amortized.

  4. Anonymous  ::  1:02 pm on May 3rd, 2008:

    In trudging through the tables, I see no indication as to whether a dynamic analysis was made by CBO incorporating the GDP multiplier on the extra moneys remaining in the private sector. They do not just disappear. Ceteris paribus, lowering tax rates has a multiplier effect on reported GDP.
    To present the figures in any other context would be to introduce an error compounded over time.
    The authors need to clearly footnote the basis for the CBO projections.
    The prosperity we are now exiting has been based on dissavings and the acquision of additional mortgage debt used to finance depreciating assets in the household sector and the huge increases in government debt used to finance the ongoing wars.
    In Japan, only the high level of household savings made their Central Bank policy of lowering its window rate effective. Our Fed does not have that luxury. Bernanke is at the end of his string and pushing.
    The consumption/gratification society must be changed into one of savings and investment. Only tax policy remains to provide a limiting corrective for the recession.
    Contracting the private sector will not work. We should eliminate or minimize taxes on savings, dividends and capital gains, but apply such provisions on the last two categories to funds reinvested domestically, with the remainder taxed at the ordinary income rate.

  5. Anonymous  ::  4:36 pm on May 9th, 2008:

    The most important part of your point is where you say “reinvested domestically”. As far as I know McCain is offering no incentives to make that happen.
    Trickle down only works if the money trickles down and not out. Which is what we have been doing for the last 8 years. Remember Bush's economic adviser actually saying that outsourcing was good for America?
    I try to bring this up as often as I can as it seems so many have forgotten. During the Reagan years we had trickle down in full swing. But what has been forgotten is that we also had a HUGE “Buy American” campaign going. I drove a Mazda in high school and damn near got in fights for it. “Buy American dude!” I heard it all the time. “Made in the USA” signs were all over Wal-Mart. It was on TV, billboards, magazines, everywhere you looked. But now Wal-Mart has replaced the “made in the USA” signs with the price rollback signs. Rolled back, because it is now made in China.

  6. Anonymous  ::  11:48 pm on August 11th, 2008:

    Your formula fails to take into consideration the increase in tax revenues from business growth due to mitigating the tax burden. You know . . . Bush's tax cuts actually increased tax revenue for that very reason. While tax % decreased, tax revenue increased.

  7. Anonymous  ::  4:18 pm on September 10th, 2008:

    you can't tax cut your way out of this one . . . you'd like a free lunch but need to get realistic

  8. Anonymous  ::  7:04 pm on September 2nd, 2009:

    That is because I can bet every man being involved in a political action is corrupted. That is something this senator may be part of. I learned many things while I was at Cinciaty movers company.

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  10. Anonymous  ::  8:23 pm on August 24th, 2010:

    I think the current state of tax debate, and the prospect of not renewing the “Bush tax cuts” for the upper class is quite pertinent to this discussion, as the republicans certainly reaped what they sowed with Sarah Palin.
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  11. Anonymous  ::  5:57 am on September 6th, 2010:

    politics has occupied even inside the house the world can't leave without politics and political party as they are the one who bring changes in everything. anyway i like the way you have presented your articles.thank you for sharing.

  12. Anonymous  ::  8:28 am on September 7th, 2010:

    politics is complicated if we don't know the real play or system behind it.once we understand than there is a various factors which we come through.
    putting the issue in consideration,we will be very much thankful if the demand is verified and put into the process. but for all this we need a great support from our surroundings no matter whatever is the issue. A public is the source of income for the political parties which will let them generate there system within the country or nation wide. I hope your campaign will surely be put into the major problems.Please don't stop these work.it will be a beneficial factor for whole citizens.

  13. Anonymous  ::  8:12 pm on September 7th, 2010:

    In Politics sometimes very crucial decisions are very important for countries future.I think Tax cuts definitely very important for countries economy and McCain is definitely have a good vision about his country.
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  14. Anonymous  ::  8:55 pm on October 26th, 2010:

    well, I am not a big fan of such kind of activities. but when is my vote needed I don't hesitate. I believe that this “advertise” is another way to fool us. even if we vote, I do not think that the elected one will hold the promises made. everything is a encore marketing, which is booming and has followers.

  15. Anonymous  ::  7:54 pm on November 17th, 2010:

    Unfortunately, corruption is part of politic too often… There is too many examples to demonstrate that.
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